What does the current industrial real estate market look like compared to past markets? State-wide, there are both hot and cold spots, but the majority of the market is simply lukewarm.
Regarding Salt Lake County, a quick historical look will help us reflect on where we are today. Since 1980, the average vacancy rate for industrial real estate is 7.56 percent. The highest vacancies were in the mid 1980s and early 2000s, where rates were between 10 and 11 percent. The early 1990s saw the lowest vacancies, where rates were between 4 and 5 percent. It is interesting to note that the low vacancies in the 1990s were accompanied by very bad markets…no one moving coupled with no place to move.
What about vacancy rates today? They are a little below the 29 year average from 1980, sitting at 7.11 percent.
There are red flags to watch for which indicate if conditions in the industrial real estate market are deteriorating. These include: falling sale prices, falling lease rates, rising vacancies, rising foreclosures, rising subleases, lack of funds, and companies closing doors.
So, where do we sit relative to the above indicators?
- Falling sale prices: After five years of rising prices, we are now seeing some softening. However, there are few buildings on the market for sale. Users who want to buy cannot find what they want and are forced to wait.
- Falling lease rates: After four years of rising lease rates, we are now seeing some softening.
- Rising vacancies: We are just below the 29 year average
- Rising foreclosures: None so far.
- Rising subleases: This segment is growing after years of very few available spaces.
- Lack of funds: For industrial companies wanting to borrow money to purchase property, money is still readily available. (Speculative developers cannot find a dime!)
- Companies closing doors: A few.
Turning our attention to lease transactions, the 10 year average in Salt Lake County is 245 per year. In 2007, there were 246 lease transactions, with 244 in 2008. Both years were virtually on par with the 10 year average.
On the flip side, building sales were down 23 percent in 2008. Sales have slowed as the result of the overall business climate and uncertainty about the strength of individual businesses moving forward.
What do we expect for 2009? This year will be slower than 2008. Lease transactions will drop 10 percent, while sales will remain about the same. There will be a few good deals for both buyers and tenants, but nothing dramatic is expected. We have a stable economy locally and it will continue for most of us. If history is any guide, the overall market will improve. For some, it is already improving, but will take a while for most.
What can you do? Prepare your business for when the turnaround occurs. Call your broker and renegotiate your lease now. Most landlords have the same concerns you do and will extend your lease to a longer time frame before they will need to release. You can expect to keep your rate at a similar number you have now for a few years to come. Be proactive, see what your options are…tighten your belt and hold on!
Mike Farmer, SIOR is an Industrial Specialist with Commerce CRG. He can be reached at 801.303.5422 or firstname.lastname@example.org.
Reproduced with permission of The Enterprise, Utah’s business journal,www.slenterprise.com.